Booz and Company Submission on the Future of Shannon Airport

 

8^th November  2011

 

Dear Sirs

 

I welcome the opportunity to submit the following, with regard to your report dealing on the future ownership options for Shannon Airport commissioned by the Minister for Transport and Tourism. In preparing my submission I note that the Department’s “summary terms of reference” states in the paragraph outlining the context of the study the need for “a strong competitive and vibrant network of air links is of vital importance for Ireland to continue to meet its national and social objectives”.

 

This statement supports my belief of the need for autonomy for Shannon Airport. In suggesting autonomy, I echo the sentiments of Clare County Council who assert in their County Development Plan the need to encourage and support the achievement of autonomy for Shannon International Airport.[i] This policy position is bolstered by the tremendous success achieved previously by Shannon when it retained control of its own affairs.

 

In that period of operation, Shannon demonstrated what could be achieved through independent management and control. It was recently expressed to me by a person who was centrally involved in that era: “Shannon always found ways to remain viable”.

 

He was reflecting on the initiatives that included:-

– The setting up of the Duty Free Shopping.

– The creation of a Development agency that helped Industrialise areas of Shannon and which introduced foreign direct investment from the US to Ireland.

– The creation, promotion and operation of tourist destinations and activities such as Bunratty Castle Banquets and Folk Park.

– The setting up of the International School of Hotel Management

– The creation of the fuel farm which allowed a competitive advantage to Shannon which has been seriously underutilised.

– The creation, operation and supervision of Aer Rianta International which was primarily put in place by Shannon’s management team with a view to support continued development of Shannon’s needs.

 

 

These outstanding achievements demonstrate what can be achieved (always in difficult times) by dedicated, competent and committed management, unrestricted by the centralised control of Dublin based authorities. Unfortunately the most obvious demonstration of that disempowerment is reflected in the putting in place in Shannon of a management team that clearly lacks the capacity of its predecessors “to make it happen”.

 

Over the last five years, I have viewed with serious concern at the continued demise of Shannon.

 

Shannon has experienced a precipitous decline of 48.2% in passenger traffic since its peak in 2006. This is alarming when compared to decline in both Dubin and Cork Airports (7.85% and 7.5% respectively). It is interesting to note that Ireland West Airport outside the control of the DAA experienced a 9.4% decline from peak during the same period.

 

This decline would be greater still were it not for US military traffic, and while the business is welcome, it is unfortunate that our proud airport should have become dependent on such sources of revenue. I have consulted many persons in an effort to develop what I deem is the best way forward for Shannon Airport and the wider region. I have held open clinics specifically on the Airport, and held detailed contacts with persons who work at the airport, current and past members of management, members of the current board, those who have served at Board level in Aer Lingus and Aer Rianta, former directors of the airport and many other key players who have a central role to play in the future of our airport, both in the private and the public sector. While some of these persons have a reticence to comment publicly, I sincerely believe that the views expressed by me here find significant acceptance with the vast majority of the people I have consulted.

 

The Future. I strongly believe that if managed properly the setting up of an independent Shannon Airport Authority is the most desirable option for the future success of our airport. I strongly feel that the demise of Shannon over the last twenty years is significantly as a result of the disempowerment resulting from the centralised structures emanating from Dublin and therefore I am of the opinion that an independent Shannon can be significantly different from the current stagnant operation.

 

I strongly believe there is a better way forward. It is critical for any such proposal to have the support of the Government. In writing to you, I am keeping my observations as brief and as focussed as possible and only setting out the principles of what is desired – the details will of course require further examination.

 

It is my belief that any meaningful plan for Shannon needs to address the following key issues:-

 

1) A Mission Statement

2) Ownership of the Airport.

3) Structure of Management.

4) Government Support.

5) Management Team.

6) Cost base.

7) Current debt and future capital expenditure.

8) Growth objectives.

 

1) Mission statement.

 

For any business to work, there needs to be a clearly defined set of goals and objectives. Shannon Airport policy has suffered from confusion in its objectives. In recent years, airport policy has been subject to an airline policy, which in turn has supported the strategy of a particular airline. Specifically, in Shannon’s case, the needs of Aer Lingus in Trans-Atlantic regulation discussions were paramount and what was best for Shannon and indeed the Region lost out, without due or appropriate consideration of the consequences.

 

There is an urgent need to differentiate between the legitimate needs and objectives of Airport and Airlines in relation to Shannon.  Airports are an essential element of transport policy and of regional spatial strategy. The policy at Shannon must be centred on the implementation of spatial policy and transport policy, which by their nature must be integrated and closely coordinated with transport in a subsidiary or supporting role. This is a distinction that must be unambiguous.

 

In relation to the new entity that I envisage having responsibility for Shannon, the following key factors must be fundamental in driving its activity,

 

(A).Shannon Airport must be the catalyst for the development of the region/area, (covering a 40 to 70 mile radius)

(B).Shannon must have connectivity with North America and into Europe, with the number of destinations served and operators utilising the airport grown significantly from its current low base.

(C).Internal access within Ireland to all other Airports and Urban centres must be aggressively addressed. Greater utilisation of the improved road and rail structure needs to be pursued. This improved connectivity can be achieved without significant cost. For example, the exchequer has greatly upgraded the rail line within 5 miles of the airport, a proper link by shuttle bus could facilitate the necessary interaction and the passengers could pay- thereby no cost accruing.

(D) Greater awareness and utilisation of the available cheap parking resources for passengers should be availed of.

 

These factors need to be addressed if the Airport is to be made commercially viable and to be reinvented as a resource that underpins the whole economic and social framework of the region. This will require realising growth both in passenger traffic (destinations and carriers) and cargo (volumes and values). The objective must be to increase revenues and to reduce costs. This will result in a more competitive Airport capable of dealing constructively with customers (passengers, airlines and freight customers). This will result in significantly increased economic activity both directly in the airport and indirectly in the region.

 

The necessary policy focus for Shannon must be part of a broader economic strategy for the country as a whole, and while essential to this region and the people who live here, it cannot be understood in isolation from an overall strategy for the economic development of the country. The resistance to Shannon is, in many instances, arising from the presentation of the Shannon issue in isolation. A proper spatial plan is as important for Dublin as it is for the Mid-West, and Shannon is an essential aspect of a proper spatial plan. The vanity led rather that spatially led building of excessive and expensive facilities in Dublin Airport and the resulting need to artificially track everyone through Dublin Airport is a clear consequence of an unhealthy obsession with centralisation, at the expense of proper regional planning.

 

2) Ownership.

 

The airport must be independent. In saying this, the independence I am seeking is independence from the centralised grip of the current Dublin based authorities. I am not saying independent of State ownership; I accept that State Ownership is critical to the well being of Shannon Airport. The new ownership of the Shannon entity must result in a structure that is independent of other entities and therefore not managed by people who may have a conflict of interest. The singular interest of its owners and managers must be the success, growth and prosperity of Shannon Airport and the Mid West Region.

 

State ownership as such of the Airport would be enhanced with the involvement of local interests; this could be provided through a structure that would accommodate a minority interest for local authorities (to include Clare, Limerick , Galway, Nth Tipperary and Kerry County Councils, Limerick and Galway Corporation) and persons and corporations from within the catchment area and indeed others supportive of the Airport. I advocate this enhancement of ownership to broaden the empowerment and responsibility of the local community with a view to strengthening the local support for the Airport. I would only advocate it on the basis that the participation of such interest would enhance and not impede the “best practice model”, as referenced above, for the future success of the new entity.

 

3) Structure of Management.

 

The key task of the owners would be to appoint a competent Board of Directors that has the ability to deliver. We require talented individuals, who are both capable and committed. A critical issue is that the Board should be led by a Chairperson who has the capacity, commitment and personality necessary for the challenge ahead.

 

The immediate challenge for the new board is to appoint a management team capable of delivering the actions as provided for in a comprehensive business plan (drawn up by the board in consultation with management) and delivering on the actions and targets set down in such a plan. The plan will cover all areas of activity relevant to the promotion and development of the Airport.

 

The Board would need to be proactive in its remit and share the responsibility for performance and results. The new Board needs to educate itself on what the management of our airport achieved in the past, those achievements were real and should inspire the new generation of management to even greater success.

 

The importance of A Comprehensive Business Plan cannot be overstated. Without a plan you cannot manage performance. Without a plan with clearly stated goals success cannot be achieved. Goals and targets need to be challenging but realistic.

 

4) Government Support.

 

While recognising the critical financial constraints placed on government, the new entity governing Shannon Airport will require Government support. The strongest expression of that support will be the putting in place of the appropriate structures. The new entity will have to be managed in a way that will in a relatively short time allow  it to cover its own costs, however, in the short term it may well be that Government financial support will be necessary.

 

It would not be unreasonable for any such funding requirement to be generated from a Local Government Contribution. This could be generated by a ring fenced contribution from the current local rate (local rate payers are currently greatly burdened but I believe the ratepayers of Clare and Limerick would gladly commit a contribution to redevelop their own Airport). Again in discussing the matter with local business people I have been told that a vibrant busy Airport generates up to 25% extra turnover in particularly the tourism service industry.

 

The Development Fee model currently administered by Ireland West, Knock is one which could also be closely looked at.

 

It is critical however, in that the only way that the funding models cited can be successful is if Shannon Airport is locally owned and run.

 

The exchequer in the short term may well be required to contribute to both Capital investment and Working Capital requirements (the cost here are miniscule in a national context e.g. the necessary expenditure on the Bunratty Latoon section of Road Development would keep Shannon operational for the next thirty years).

 

I do not have access to Shannon Airport’s accounts and so am at a loss to determine the possible financial requirements. Obviously the long-term viability of the project is at the very least dependent on it remunerating its own costs. This will have to be addressed in the drafting of the business plan, but it is not possible in the absence of detailed financial statements to be more explicit in this regard. The fact that we so find ourselves should not restrict a full evaluation of the future financial viability of the project. I particularly assert this bearing in mind the negative mindset expressed by many that “an independent airport can not survive financially”, I reject any such assertion as unreasonable, it being either expressed by commentators who have no access to the figures or by persons who have such information but are not trusting of what can be achieved in a new situation.

 

5) Management Team.

 

The Airport needs a management team that displays competent professional management skills and appropriate commercial experience. They need to (in consultation with the Board) draw up a business plan, pursuing objectives, reaching targets and giving the necessary leadership to staff. The challenge for management is to “make it happen”. The current structure clearly has not provided such a team. Instead the airport is currently managed by a team whose objectives have been set by a parent body who are comfortable with the status co. This in turn has created a mindset that the current level of operation is sufficient challenge for management, so all have become content with mediocrity, an opinion that is regularly demonstrated by current management in public forums.

 

6) Cost base.

 

The Airport must have a realistic cost base. The current ethos of “big cost, small revenues and someone else making up the difference” cannot continue. The cost base needs to fit reality. The airport, no more than any other project, cannot survive unless it is commercial. This means (that within a reasonable short period) it has to cover its costs. This probably means “a new start”. We are constantly told about the losses but there is a great absence of transparency when it comes to costs. If anything is to be learned from the recent debacle in our national finances it is that one cannot live indefinitely beyond one’s means. This applies as much to individual projects as it does to the State. It certainly applies to our Airport. In this regard it is important to acknowledge the concerns of the people who currently work in the airport. Their fears need to be addressed. When I talk of curtailing cost I am certainly not talking of cutting their remuneration. What I am referring to is the need to control a system that on the one hand negotiated a reduction in staff wages and on the other paid out a bonus to management. Many front line workers at Shannon take issue with this apparent contradiction. As a business model it is both inequitable and unsustainable. I think it is also important to assure workers that European law protects their entitlements in any restructure proposal. I am not making this case for workers just as a hollow public relations exercise, the failure of the Airport to perform is in the first place, a matter for management from the highest levels in the DAA and is also the failure of local management and needs to answer for. Workers should not be used as the scapegoat in this. Likewise I abhor the attempts of management to scare workers, with comments like “if anything happens ye will be the first the go”. In my opinion, the position of the workers should be protected in any evolving environment.

 

Aside from wage costs, the other changes need to be addressed in a realistic manner. The owners, workers, board and management of the new airport must make it happen (supported actively by the local community, who are so dependent on Shannon’s success). This challenge is central to our new structures.

 

7) Current debt and future capital expenditure.

 

Any plan must not deal with existing debt alone but must also address future capital costs. Existing debt needs in the first place to be ring fenced. Depending on the amount involved consideration needs to be given as to how this can be discharged. Likewise the Business Plan must deal realistically with future capital expenditure requirements. There is a very strong feeling that the Aer Rianta International project, which was the brainchild of Shannon Management under the astute leadership of Liam Skelly, was in the first place developed with the need to generate reserves to underpin the future viability of Shannon. ARI before being subsumed into the DAA was the Intellectual Capital of Shannon Airport. While I understand the Government may be considering the sale of ARI, the revenue from any such disposal should in the first place be ring fenced to cover the funding of the future capital requirements of a newly structured Shannon. It is of concern that significant funds from the ARI basket have been gifted to Dublin Airport to reduce the cost of the new terminal and yet some people tell me that ARI funds cannot be allotted to Shannon. This is clearly placing Shannon at a significant disadvantage.

 

7) Growth Objectives.

 

What are realistic targets for the airport? The recently identified targets by the current Airport operators of 2.5m passengers by 2015 are gravely disappointing. Couching our ambitions in language that talks about “the need to be realistic” is not encouraging. Instead we need to be ambitious and courageous. Brendan O Regan’s dreams for Shannon were not anchored in “the need to be realistic” mentality but rather in “the need to be creative, courageous, ambitious and challenging”. Above all, Mr O Regan delivered because he did not take no for an answer and had Shannon’s best interests at heart.

 

It is time we took responsibility for our own affairs in this region. It is time to say no to the continued decline of Shannon. It is time for a new start. It is time we started to maximise the growth potential for the region from the resource that our Airport can become again. With the right will this can be achieved. Government can facilitate this by in the first place encouraging all of the interested parties to respond to this new challenge of a new bright beginning for Shannon.

 

A good place to start would be for Government to appoint an interim Board with a remit to prepare a comprehensive business plan, fully costed and detailed. The challenge for this new Board would be to show it can be done. If they can so demonstrate this, then they should be given the authority to take on the challenge of responsibility for the New Shannon Airport and help write the next chapter for both the Airport and the Region as a whole

 

Joe Carey TD

 

 

November 2011